Tuesday, December 2, 2014

Fly Ash, Concrete, And That Worthless Asshole

I have a son who is in the construction business. More specifically, he is in the concrete business. He owns his own company. It is a typical small business - one owner LLC, with gross revenues in the low to mid seven figure range.  He has a small number of people on his payroll (around 10) but that is by design. He employs several subcontractors on a regular basis who depend on him for the bulk of their work. This is a work-around to avoid the multitude of onerous government regulations that make running a small business so difficult (the obvious one is obamacare, but there are many, many others). All told, he probably is the livelihood for somewhere from 70 to 80 people. And that doesn't include the secondary or 'trickle-down' employment: generating demand for for concrete and lumber, contracting with accountants and lawyers, obtaining all sorts of insurance, buying and maintaining vehicles and heavy equipment, and so forth, all of which in turn stimulates employment in firms providing those goods and services.

His work follows a pattern that is familiar to most business people. Get the job specs, cost it out, and submit a bid. Part of the cost estimate is based on the cost of raw material - in his case, that's primarily concrete. Yesterday he got a notice from his primary concrete supplier that the cost of concrete is going up by a substantial amount. This forces him to choose from several options, none of which are attractive. He can raise his prices, which either makes his bids less competitive or forces his customers to pass the increased cost along to their customers, which eventually affects the greater economy. He can eat the price increase, which reduces his margins and leads to cost-cutting; reduced salaries and/or reduced number of employees, which also eventually affects the greater economy. He can reduce the quality of the concrete he uses, making the end product less desirable (for example, he can substitute Portland cement for concrete, which is okay for some projects, but not appropriate for others).

Those are all problems familiar to most business people. But what makes this case interesting is that it is an excellent example of the Law of Unintended Consequences.
The law of unintended consequences, often cited but rarely defined, is that actions of people—and especially of government—always have effects that are unanticipated or unintended.
The price increase of concrete is an unintended consequence of obama's war on coal.
Coal generates 40% of America's electricity—more than any other energy source ... The EPA's war on coal has troubling economic implications for every American and U.S. business. As the new regulations take effect, Americans could see their electric bills increase annually by more than 10% ... Coal also provides, directly and indirectly, hundreds of thousands of jobs across the country ... the EPA's anti-coal crusade could terminate 600,000 American jobs by 2023 while dampening economic growth by more than $2 trillion.
In addition to raising electric rates and cutting jobs, shutting down coal power plants eliminates the primary source of fly ash, which is a critical component in concrete. Another well-known law, the Law of Supply and Demand, tells us that a reduction in supply results in an increase in price (assuming demand holds steady). Thus less fly ash means more expensive concrete. That not only affects my son's business, but every business and project that uses concrete - roads, new homes, new commercial construction, and so on.

Intellectually, I was familiar with all this. But until I talked with my son I didn't grasp the real impact of barry's misguided policies on real people, their families, and the greater economy. Just one more example of why that loser is so bad for this country, and why we'll be so better off when that worthless asshole is out of office...


Well Seasoned Fool said...

Excellent observation. Somehow we need to tie civil service salaries directly to the economic consequences of their actions.

jeffli6 said...

Tim - Yep, it is insane. I am a project manager/estimator for a concrete company and have been through all the same issues. I don't have the headache of ownership but it's a trade off, my owner is a very wealthy man from over thirty years in business. But I digress.
It's difficult enough to run the company but all of these regulations become a paperwork nightmare let alone the costs associated with misguided political regulations. My job is 60/40 now. 50% compliance 50% work related. Adding material cost increases adds to the headache.

CenTexTim said...

WSF - Good idea. I wish we could, not just the civil service drones but elected officials as well.

Jeff - Out of the 10 people on his payroll, one is an office manager who has a similar workload split - 50% managing the business, 50% dealing with government regs. Not to mention the lawyer and accountant, who spend a lot of billable hours on the same thing.

Harper said...

Ahem, you two guys with the concrete hook-ups, my company is often in desperate need of concrete and/or concrete subs...especially in the wilds of the Permian. If you can help, email me.